First Republic Bank Shares Continue Their Free Fall Amid Mounting Worries

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April 26, 2023

Trading of First Republic Bank stock halted for the second time on Wednesday after its share price plunged more than 50%.

Via cbsnew.com:

First Republic Bank's stock price continued to plunge Wednesday, fueling concerns about the regional lender's prospects following the recent collapse of Silicon Valley Bank and Signature Bank.

After shedding half their value on Tuesday, First Republic shares tumbled nearly 30% to close at $5.69, with the New York Stock Exchange halting trading in the stock several times because of volatility. Since January, the shares have shed 95% of their value, a market loss of more than $21 billion.

Investors were spooked by the bank's disclosure on Monday that depositors withdrew more than $100 billion during last month's crisis, raising concerns about First Republic's stability. The fund outflows were "unprecedented," bank executives said on an earnings call Monday.

I’ve never seen a bank run in Brentwood Los Angeles in over 40 years — this is at first republic bank branch. People standing in rain pic.twitter.com/k31PqqpyO3
— pjb.eth (@Dr_PhillipB) March 11, 2023

The troubled bank said it now plans to sell off assets and restructure its balance sheet, as well as lay off as much as a quarter of its workforce, which totaled about 7,200 employees at the end of 2022. The bank will also shrink its corporate office footprint, cut executives' compensation by a "significant" amount and eliminate "nonessential" projects, executives said Monday.

"Investors got a sharp reminder on Tuesday that the U.S. banking crisis and broader credit crunch are not over," wrote Will Denyer of Gavekal Research in a research note.

As with Silicon Valley Bank, an outsized share of First Republic's customers are wealthy, with many whose accounts exceed the $250,000 deposit limit guaranteed by the Federal Deposit Insurance Corp. As of March 31, and before big banks rescued the lender in March with a $30 billion injection of capital, 27% of First Republic's deposits were uninsured, according to a recent earnings release.

Bank of America, Citigroup, JPMorgan Chase and Wells Fargo each chipped in with $5 billion in funds for First Republic. Goldman Sachs and Morgan Stanley contributed $2.5 billion, while BNY Mellon, PNC Bank, State Street, Truist and U.S. Bank added $1 billion.

"Wealthy clientele such as the affluent individuals that banked at [First Republic] have no loyalty to any particular financial adviser," Chris Whalen, chairman of Whalen Global Advisors, said in a note to investors. "First Republic was one of many advisers and service providers to their wealthy customers, people who find products like interest-only mortgages attractive."

He added, "These same products helped the bank to retain assets in normal times, but when liquidity risk arose the wealthy clients ran away."

Wall Street downgrade

With clients withdrawing their money, First Republic was forced to borrow from federal programs to shore up its balance sheet. The interest the bank must pay on those funds is much steeper than what it has to pay for deposits, which will affect its profits.

A Citi analyst downgraded First Republic shares on Wednesday, pointing to the mounting uncertainty over its potential losses. "The high cost of its borrowings relative to its earning assets puts it under-water and likely generates losses until it can right-size the balance sheet," the analyst wrote.

Jaret Seiberg, an analyst with TD Cowen, thinks the big banks that joined forces to contribute the billions in additional deposits last month may need to ride to First Republic's rescue a second time.

"This restructuring could still take days or weeks or months as the banks try to understand what value there is in the franchise and what loss they would be willing to absorb," he said in a report.